home savings

Loan features available for those with savings

You are in a better position to achieve financial goals if you have a dedicated savings plan.

You might be saving for a comfortable retirement, to invest in property or to upgrade your existing home as your family grows.

If you have significant funds in a savings account, there are features available on home loans that can help you utilise your savings.

From offset accounts to choosing the right kind of home loan, be aware of the features available when taking out a home mortgage so you can make the most of your savings!

Offset account

An offset account suits those with considerable savings.

This type of account is similar to a transaction account - you can connect it to your debit card and use it for everyday spending and paying bills.

However, you can also use the balance to offset the loan on your mortgage.

For example, if you have a $400,000 loan and $20,000 savings in your offset account, you would only pay interest on $380,000 of your loan.

Another way that offset accounts can work is to apply interest earned on your account to your home loan. While the interest you earn in a savings account is taxable, the interest to offset your home loan isn't.

The effect of this is that you save tax and reduce your home loan concurrently. You can use your own money to drive down the interest owed on your mortgage, allowing you to pay off the principal faster.

Whether it's your own home or an investment property, an offset account could be right for you if you have savings that would otherwise be sitting idly in a transaction account.

What kind of loan?

The principal is the amount you borrow, while the interest is what you pay to borrow this money - it's generally calculated as a percentage.

While an interest-only loan will reduce your initial repayments, you'll likely end up paying more interest over time.

Interest-only loans require you to pay only the interest on a loan. When the loan period ends (or the property is sold), you have to pay back the principal in a lump sum.

However, interest-only loans will often fall back to a principal and interest repayment arrangement after the initial period.

Interest-only loans are more frequently used by investors who can obtain tax benefits from this approach and don't hold onto the property for the term of the loan.
This type of loan is not always right for owner occupiers who likely want to increase their property's equity. If you're not paying off the principal, then you're not increasing the equity in your home.

If you have significant savings that can help with your mortgage repayments, an interest and principal loan may be ideal for you.

Unlike an interest-only loan, a principal and interest loan requires you to make repayments on both the principal and the interest.

This means that you're actively reducing your debt while increasing your equity. The equity in an asset - such as your home - is its value, minus what you owe on it.

If you take out a principal and interest loan you can build up your equity and you may see an increase in the property's capital value too, depending on the specific market you buy into.

You could even utilise this equity to carry out a mortgage refinance and purchase a second property as an investment. If you have significant savings, you're in a better position to make the repayments on both assets - rental income alone may not cover the costs of a rental property.

Remember to consult a financial adviser if you're unsure of the right kind of loan for you.

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This information has been prepared without taking into account your individual objectives, financial situation or needs. You should, before acting on this information, consider its appropriateness to your circumstances.